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Edited Transcript of DEST earnings conference call or presentation 17-Sep-19 2:00pm GMT

Q2 2019 Destination Maternity Corp Earnings Call

PHILADELPHIA Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Destination Maternity Corp earnings conference call or presentation Tuesday, September 17, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Helkey

Destination Maternity Corporation - COO & CFO

* Lisa A. Gavales

Destination Maternity Corporation - Chair of the Office of the CEO, Interim CEO & Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Destination Maternity's Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

At this time, I would like to introduce your host for today's conference call, Mr. David Helkey, Chief Financial Officer and Chief Operating Officer.

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David J. Helkey, Destination Maternity Corporation - COO & CFO [2]

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Thank you, operator. Good morning, everyone, and welcome again to Destination Maternity's Second Quarter Fiscal 2019 Earnings Call. The earnings release that was disseminated this morning is also available on the Investors section of our website.

The earnings release contains definitions of various financial terms as well as reconciliations of certain non-GAAP financial measures we will be discussing today. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.

This call will include certain forward-looking statements within the meaning of the federal securities law. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts, and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's SEC filings.

Also, I'd like to remind you that this call cannot be reproduced in any form without the express written consent of Destination Maternity.

Joining me on the call today is Lisa Gavales, Chair of the Office of the CEO. Lisa will open with some remarks, followed by myself walking through the financial results.

I will now turn the call over to Lisa.

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Lisa A. Gavales, Destination Maternity Corporation - Chair of the Office of the CEO, Interim CEO & Director [3]

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Thank you, Dave. Good morning, everyone, and welcome to our second quarter 2019 earnings call. I want to start today with a brief business overview. I will then turn the call over to Dave for a review of our financials.

Our top line performance and earnings fell well short of expectations in the second quarter. Specifically, comparable retail sales were down 10.5% in the quarter. While we experienced improved conversion rates in-store, softer foot traffic in Q2 weighed heavily on sales. Additionally, e-commerce comparable sales were down 6.4% with each month improving over the last.

As part of our efforts to reinvigorate our e-commerce channel, we recently took steps to reorganize our leadership team and continued to make upgrades to our websites to improve traffic and drive conversion.

On the cost side, we made the difficult but necessary decision in June to take a reduction in force. This action alone is expected to generate cost savings of $4.5 million on an annualized run rate basis. This, coupled with continued expense discipline across the organization, drove a roughly 10% year-over-year decline in SG&A expense.

We also held gross margin rates roughly in line with the prior year, but, as with first quarter, the sales miss in Q2 was too significant to drive incremental profit dollars. In short, our results this quarter illustrates the challenges that persist across the business.

Having served in the role of Chairman of the Office of the CEO since June, it has become clear to me that we need to take more prudent and decisive action to preserve liquidity and ensure a position in this business to drive profitable growth.

In response, this morning, our Board of Directors announced that it has initiated a review of strategic alternatives focused on maximizing shareholder value. Advised by Greenhill & Co,. the Board will evaluate potential outcomes from the review, including, but not limited to, a sale or a merger of the company, continuing to pursue value-enhancing initiatives as a stand-alone company, capital structure optimization that may involve potential financing, and/or the sale or other disposition of certain businesses or assets.

Our Board has not set a definitive timetable for completing the strategic review. During the review process, we will be focused on stabilizing our financial performance while the company also continues to search for a permanent CEO. There can be no assurances that the exploration of strategic alternatives will result in any particular outcome. This company does not intend to provide updates unless or until it determines that further disclosure is appropriate or necessary.

Additionally, as a result of this action today, we will not be conducting a question-and-answer session following our prepared remarks on the call.

In closing, I continue to believe in this business and the strength of these brands. I look forward to working closely with the Board to determine next steps for the business.

I would now like to turn the call over to Dave.

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David J. Helkey, Destination Maternity Corporation - COO & CFO [4]

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Thanks, Lisa, and good morning again, everybody. This morning, I'll review our fiscal 2019 second quarter and year-to-date performance and key items on our balance sheet and cash flow.

Sales for the second quarter were $84.9 million, a decrease of $11.5 million or approximately 12% from the second quarter last year. The decrease in total sales resulted from the net closure of 34 stores and 143 leased apartments, combined with a 10.5% decline in comparable retail sales.

By channel, the comparable retail sales decline of 10.5% was brick-and-mortar. Comparable sales were down 11.9%. while e-commerce sales were down 6.4%. Gross margin for the second quarter was 51.4%, a decrease of 30 basis points from the same quarter last year. This decrease was primarily driven by the growth of our e-commerce business compared to our brick-and-mortar business.

Gross profit for the second quarter was $43.6 million, a decrease of $6.2 million or 12.5% from the second quarter last year. SG&A expenses for the second quarter were $45.2 million, a decrease of $4.9 million or 9.9% from the comparable quarter last year and was 53.2% of sales versus 52% last year.

The decline in SG&A in fiscal 2019 compared to fiscal 2018 reflects reductions in employee costs and occupancy expenses, resulting from the closure of underperforming stores along with ongoing expense reduction initiatives.

The net loss for the second quarter was $3.5 million or 25% -- $0.25 per share compared to a net loss of $4 million or $0.29 a share last year. Adjusted net loss was $2.8 million or $0.20 a share compared to adjusted net loss of $1.6 million or $0.11 per share for the second quarter of fiscal 2018.

Adjusted EBITDA before other charges for the second quarter was $2 million, which was down $2 million from the comparable quarter last year.

I will now turn to our year-to-date results. Sales for the first 6 months ended August 3, 2019 were $179.1 million, a decline of $20.5 million or 10.3% from comparable period last year. Comparable retail sales were down 8.7%, which reflects the net effect of an 8.4% decrease in comparable brick-and-mortar sales combined with the 9.6% decrease in e-commerce sales.

Additionally, sales are impacted by the previously mentioned decreases in store count.

Gross margin for the 6 months was 53.2%, an increase of 50 basis points from the comparable period last year. This year-over-year increase in gross margin was driven primarily by the pullback in promotional cadence, slightly offset by the previously mentioned growth of our e-commerce business.

Gross profit for the first 6 months was $95.2 million, a decrease of $10 million or 9.5% from last year.

Selling, general and administrative expenses for the first 2 quarters of 2019 were $93.6 million, a decrease of $8.3 million or 8.2% from comparable period last year. The decline in expenses reflects a reduction in employee costs and occupancy expenses related to the closure of underperforming stores and ongoing expense reduction initiatives.

Adjusted EBITDA before other charges for the first 6 months was $8.7 million, a decrease of $3.1 million or 26.6% from the comparable period last year.

Net loss for the 6 months of fiscal 2019 was $3.4 million or $0.25 per share. For the comparable period last year, the net loss was $3.8 million or $0.28 per share.

Adjusted net loss was $2.2 million or $0.16 per share compared to adjusted net loss of $0.6 million or $0.04 a share for the 6 months ended August 4, 2018.

Turning now to our balance sheet. At quarter end, inventory was $67.7 million, essentially flat to last year, and debt, net of cash, was $47.3 million, an increase of $12.7 million from last year. Through the second quarter of 2019, we opened 1 store and closed 13 stores for a net reduction of 12 retail stores. We ended the quarter with 446 retail stores.

Capital expenditures for the first 6 months of 2019 were $3.8 million, an increase of $1.2 million from last year. Year-to-date capital outlays were primarily the result of investments in the implementation of an OMS platform combined with modest store investments as we optimize our real estate portfolio.

These investments represent a measured and revenue-focused approach to capital expenditures that will continue as we move forward.

That concludes our remarks for today. We thank you for listening.

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Operator [5]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.